Credit card issuers are laboring in an environment of rising delinquencies, possible interest rate increases, strong price competition, likely industry consolidation, and heightened regulatory demands.¹ These forces are generating strong pressure for better risk management, and the responses have been diverse, according to a survey of 13 major issuers, including 5 of the top 10 in the United States and 4 of the top 10 in Canada.² No single company excels across the board in risk management, we found. Four broad approaches that emerged in the survey suggest ways for issuers to use risk management to improve their profitability by as much as 5 to 15 percent.

1. Optimizing value, not minimizing risk. Many issuers still rely primarily on risk factors when they make underwriting decisions, assign credit lines and products, and manage accounts (Exhibit 1). These companies may leave money on the table by being either too stringent with profitable but slightly riskier customers or too cavalier with loans to the less risky. One alternative is to forecast the net present value of potential customers—an approach that helps issuers approve accounts for (and assign credit lines to) the people most likely to use them and to...